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Are Short Sales and Foreclosures Your Path to Riches?There are hundreds of properties in the Phoenix Metro approaching foreclosure and homebuyers and investors are seeking the best deal towards pursuing short sales. Our current real estate market has no doubt seen better days and investors know short sales are a sure path to big profits. While we get this ideal picture in our heads of locating the perfect house, purchasing and either flipping for profit can be far from the truth. Before approaching the idea of investing in short sales and foreclosures you should take caution and fully understand how the process works. Short Sales In a conventional home sale, the property is sold for enough money to pay off the existing mortgage or mortgages, and to pay the sellers’ closing costs. When the mortgage amount plus closing costs equal more than the selling price, the sellers are “short” the amount needed to close the sale. Sellers with sufficient financial resources can use money from other sources such as savings, to pay the amount they are deficient and complete the sale. Sellers unable to do this may convince their lender to accept a loan payoff that is less than the amount owed. A “short sale” refers to a sale where the lender agrees to accept a reduced loan payoff. Some lenders call this a “workout.” Wondering why a lender would agree to accept less than full payment? Today most lenders will accept a BIG deduction because their books are full of foreclosed homes or homes steadily approaching that phase. These lenders would prefer to clear the loan from their books, even at a loss. When a borrower becomes delinquent on loan payments the lender is often faced with a foreclosure procedure, which is very costly. Negotiating with the lender can be difficult. Many lenders will not consider a short sale until the property is marketed and the sellers are sure they cannot sell for enough to pay the loan off completely. Anyone purchasing a short sale will need a lot of patience. This process usually takes time and will require persistent savvy negotiation on the part of the sellers and their agent. You probably will have more difficulty negotiating the price on a short sale property than on a property where the sellers are making a profit. But even though the lender will want the highest price possible to minimize their losses, they usually have a strong motivation to sell. If they didn’t have an urgent need to sell NOW, they would just wait for the market to improve. Foreclosures Sellers who are selling short are probably not current on their mortgage and are in financial disarray however they are taking measures to appropriately sell their house and maintain some level of credit worthiness. A foreclosure on the other hand is a completely distressed sale that occurs when there is no hope of the owners saving their home or negotiating fair terms with the lender. Several types of foreclosure proceedings exist and state law governs the specifics of how foreclosures are handled. Often foreclosed properties are sold to the highest bidder. Those properties not sold off to a new owner revert to the lender and are called REOs – real estate owned. REOs are often listed for sale through a real estate broker, but sometimes lenders have an inventory of REOs that are not actively marketed. You could get a good deal purchasing a foreclosure property, but buying foreclosures like fixer-uppers, requires hard work and thorough research. Often touted as a quick way to get rich, you can just as easily lose your shirt on foreclosures. You need lots of hand-holding from an experienced realtor. If property values have dropped since the property was purchased, the remaining loan balance could exceed the market value of the property. So you may end up not getting a great break on the price. Some foreclosures are sold “as-is” regarding property condition. If this is the case, make sure to have the property thoroughly inspected before you make an offer. A distressed sale property is most likely in bad condition. Both types of purchases can
be a good investment for a buyer with patience and those willing to put in a
little time and research. |